Edited version of private ruling

Authorisation Number: 1011482821555

This edited version of your ruling will be published in the public Register of private binding rulings after 28 days from the issue date of the ruling. The attached private rulings fact sheet has more information.

Please check this edited version to be sure that there are no details remaining that you think may allow you to be identified. Contact us at the address given in the fact sheet if you have any concerns.

Ruling

Subject: Division 7A and marriage breakdown

Question 1

Does section 109J of the Income Tax Assessment Act 1936 (ITAA 1936) apply to a Family Court Order made under the Family Law Act 1975 (FLA) that directs a private company to transfer property to a party to the marriage?

Answer

No

Question 2

Will the payment be a dividend for the purposes of section 6(1) of the ITAA 1936 or subdivision D of Part III of the ITAA 1936?

Answer

No

This ruling applies for the following period

1 July 2009 to 30 June 2011

The scheme commenced on

The scheme commenced in the year ended 30 June 2010

Relevant facts

Director A and Director B are directors of a private company who are currently negotiating a marriage settlement and are in the process of obtaining consent orders pursuant to section 81 of the FLA to split assets.

The orders will involve not only the personal assets of the directors, but those assets owned by a Trust and a private company.

It is proposed under the settlement that Director A will receive a cash payment and a number of shares from the private company.

Additional facts include:

The beneficiaries of the Trust include Director A, Director B and a private company;

Director A and Director B are shareholders of the private company;

The private company has an unpaid present entitlement owed by the Trust, of which no part amounts to an unrealised gain;

Director B has an unpaid present entitlement owed to them by the Trust, of which no part amounts to an unrealised gain;

Director A has no unpaid present entitlement owed by the Trust;

The unpaid present entitlement owed to the private company will remain unpaid before the earlier of the due date for lodgement and the date of lodgement of the Trust's income tax return for the year in which the property is transferred;

The private company has a distributable surplus for the year ended 30 June 2009 (retained earnings do not include any revaluation reserves);

Director A will resign as director of the private company and shall transfer their shares in that company to Director B.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 109C

Income Tax Assessment Act 1936 Section 109J

Income Tax Assessment Act 1936 Section 109RC

Income Tax Assessment Act 1997 Section 109ZD

Reasons for decision

All legislative references hereafter are to the Income Tax Assessment Act 1936 (ITAA 1936) unless otherwise indicated.

Question 1

Summary

Section 109J does not apply to a Family Court Order made under the FLA that directs a private company to transfer property to a party to the marriage.

Detailed reasoning

Subsection 109C(1) provides that a private company is taken to pay a dividend to an entity if the private company pays an amount to the entity during the income year and either:

· the entity is a shareholder or associate of a shareholder in the company at the time of the payment; or

· a reasonable person would conclude that the payment was made because the entity has been a shareholder or associate at some time.

By virtue of subsection 109C(3) the definition of payment includes a transfer of property to the entity.

Subdivision D of Division 7A sets out certain types of payments that are not treated as dividends by section 109C. Under subdivision D, section 109J requires that the payment must discharge an obligation of the private company to pay money to the entity and the payment does not exceed the amount required to discharge the obligation had the parties been dealing at arms length.

The transfer of property, being the shares, from the private company to Director A is a payment for the purposes of section 109C and would therefore meet the requirements to be treated as a dividend for the purposes of subsection 109C(1).

Although the private company would be a party to the court proceedings and subsequently bound by the Family Court Order, the order itself would not be an obligation to pay money, rather it is an order to transfer property. As such, section 109J has no application and Director A would be deemed to have received a dividend in accordance with section 109C.

Although the transfer of the property by the private company is a deemed dividend, subdivision DB of Division 7A sets out other exceptions that may apply. In particular, section 109RC allows a dividend to be franked if it is taken to be paid because of a family law obligation.

A 'family law obligation' is defined in section 109ZD as 'an order agreement or award mentioned in paragraph 126-5(1)(a), (b), (c), (d), (e) or (f) of the Income Tax Assessment Act 1997'. Those provisions refer to:

(a) a court order under the Family Law Act (FLA) or a corresponding foreign law;

(b) a maintenance agreement approved by a court under FLA s 87 or a corresponding agreement approved by a court under a corresponding foreign law;

(c) a court order under a state law, territory law or foreign law relating to de facto marriage breakdowns;

(d) something done under a binding financial agreement made under FLA Pt VIIIA or a corresponding foreign law;

(e) something done under an award made in an arbitration under FLA s 13H or a corresponding state law, territory law or foreign law; or

(f) something done under a written agreement that is binding because of a state law, territory law or foreign law relating to de facto marriage breakdowns and that cannot be overridden by an order of a court (except to avoid injustice).

Subsection 109RC(3) provides that the private company may frank the dividend in accordance with Part 3-6 of the ITAA 1997, subject to the dividend being franked at the private company's benchmark franking percentage for the period in which the dividend is taken to be paid, or if no franking percentage exists, at 100%.

Therefore, as the transfer of property will be made due to a family law obligation, the private company will be able to frank the dividend in accordance with section 109RC.

Question 2

Summary

The payment will not be a dividend for the purposes of section 6(1) or subdivision D of Part III of the ITAA 1936. It is a deemed dividend in accordance with section 109C.

Detailed reasoning

Section 6(1) defines 'dividend' to include:

(a) any distribution made by a company to any of its shareholders, whether in money or other property; and

(b) any amount credited by a company to any of its shareholders as shareholders;

(c) (Repealed by No 63 of 1998)

but does not include:

(d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of subsection (4), does not apply or moneys paid or credited, or property distributed for the redemption or cancellation of a redeemable preference share), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of the share capital account of the company; or

(e) moneys paid or credited, or property distributed, by a company for the redemption or cancellation of a redeemable preference share if:

(i) the company gives the holder of the share a notice when it redeems or cancels the share; and

(ii) the notice specifies the amount paid-up on the share immediately before the cancellation or redemption; and

(iii) the amount is debited to the company's share capital account;

except to the extent that the amount of those moneys or the value of that property, as the case may be, is greater than the amount specified in the notice as the amount paid-up on the share; or

(f) a reversionary bonus on a life assurance policy.

Provided the payment, being the transfer shares, is made by the private company pursuant to court proceedings to which they are a party, the payment would not come within the definition of the word 'dividend' provided in section 6(1). The nature of the payment would not be in the form of a distribution, rather it would be made in accordance with a court order.

As the payments are not dividends under section 6(1), but rather a deemed dividend in accordance with section 109C, subdivision D of Part III of the ITAA 1936 has no application.